Pension fund tax free lump sum then drawdown.

Albermarle

Tax_Slave said:

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

There are two separate issues, that are regularly confused together.

Currently any unused DC pension pots are not included in your estate when you die, and are not included in IHT calculations.
From 2027 they will still not be included in your estate, but will be included in IHT calculations. ( not relevant if the beneficiary is your spouse) .

Currently an unused DC pension pot that is passed to a beneficiary is not subject to income tax on withdrawal if you die before 75.. After 75 the beneficiary would have to pay income tax on withdrawals ( this is the rule that I said might change at some point ) These rules apply also when the spouse is the beneficiary.

The two issues are not linked and are separate .

DRS1

Tax_Slave said:

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

It is why the papers go on about some super high tax rate once the IHT change comes in.  First potentially 40% IHT on the pension pot and then Up to 45% income tax on the amount drawn from what is left of the pot.  So the beneficiary could be left with just 33% of the pot.

They don't go on so much about the scenario where there is no actual IHT and no income tax.  That would not make a great headline.

Albermarle

DRS1 said:

Tax_Slave said:

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

It is why the papers go on about some super high tax rate once the IHT change comes in.  First potentially 40% IHT on the pension pot and then Up to 45% income tax on the amount drawn from what is left of the pot.  So the beneficiary could be left with just 33% of the pot.

They don't go on so much about the scenario where there is no actual IHT and no income tax.  That would not make a great headline.

Also they give the impression that if you are liable for IHT, then somehow all your pension pot has to pay 40%.
In reality it would only be a portion of it, in many cases a small portion.
Unless the executor deliberately loaded the IHT liability onto the pension pot to reduce its impact on other assets.
However exact rules and recommended procedures are still to be fine tuned I think. 

MarlowMallard

Albermarle said:

In reality it would only be a portion of it, in many cases a small portion.
Unless the executor deliberately loaded the IHT liability onto the pension pot to reduce its impact on other assets.
However exact rules and recommended procedures are still to be fine tuned I think. 

Presumably, after 2027 it makes sense for the executor to pay as much IHT as possible out of the pension pot, as this will be subject to income tax 
later on, while the other assets once inherited will not be ? 

Tax_Slave

Albermarle said:

Tax_Slave said:

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

There are two separate issues, that are regularly confused together.

Currently any unused DC pension pots are not included in your estate when you die, and are not included in IHT calculations.
From 2027 they will still not be included in your estate, but will be included in IHT calculations. ( not relevant if the beneficiary is your spouse) .

Currently an unused DC pension pot that is passed to a beneficiary is not subject to income tax on withdrawal if you die before 75.. After 75 the beneficiary would have to pay income tax on withdrawals ( this is the rule that I said might change at some point ) These rules apply also when the spouse is the beneficiary.

The two issues are not linked and are separate .

So as the beneficiary is my spouse (at current standing £275,000 untouched pension pot) then no tax now (as I will not see 75) with current rules and post 2027 when IHT is applied to it no tax as spouse does not pay IHT.

squirrelpie

MarlowMallard said:

Presumably, after 2027 it makes sense for the executor to pay as much IHT as possible out of the pension pot, as this will be subject to income tax 
later on, while the other assets once inherited will not be ? 

AFAIK, it's not even clear yet whether the executor will have any power to say how much IHT the pension pays. It looks like it might be up to the trustees (or administrators) of the pension to pay the tax that is due on it.

Albermarle

Tax_Slave said:

Albermarle said:

Tax_Slave said:

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

There are two separate issues, that are regularly confused together.

Currently any unused DC pension pots are not included in your estate when you die, and are not included in IHT calculations.
From 2027 they will still not be included in your estate, but will be included in IHT calculations. ( not relevant if the beneficiary is your spouse) .

Currently an unused DC pension pot that is passed to a beneficiary is not subject to income tax on withdrawal if you die before 75.. After 75 the beneficiary would have to pay income tax on withdrawals ( this is the rule that I said might change at some point ) These rules apply also when the spouse is the beneficiary.

The two issues are not linked and are separate .

So as the beneficiary is my spouse (at current standing £275,000 untouched pension pot) then no tax now (as I will not see 75) with current rules and post 2027 when IHT is applied to it no tax as spouse does not pay IHT.

When your Spouse dies, her assets will be assessed for IHT in the normal way . If the pension pot is still there it will be added to everything else in her estate ( house, savings etc ) to calculate any IHT liability. ( presuming it is after 2027. 

Her estate  will have the benefit of inheriting your nil rate band of £325K to add to her own.
Also if the house is left to children there will be an additional £175K nil rate band X 2 .
So in that case only assets over £1 Million in her estate would attract 40% IHT.

With married couples, if there is any IHT liability, it usually only becomes payable on the second death

Tax_Slave

Albermarle said:

Tax_Slave said:

Albermarle said:

Tax_Slave said:

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

There are two separate issues, that are regularly confused together.

Currently any unused DC pension pots are not included in your estate when you die, and are not included in IHT calculations.
From 2027 they will still not be included in your estate, but will be included in IHT calculations. ( not relevant if the beneficiary is your spouse) .

Currently an unused DC pension pot that is passed to a beneficiary is not subject to income tax on withdrawal if you die before 75.. After 75 the beneficiary would have to pay income tax on withdrawals ( this is the rule that I said might change at some point ) These rules apply also when the spouse is the beneficiary.

The two issues are not linked and are separate .

So as the beneficiary is my spouse (at current standing £275,000 untouched pension pot) then no tax now (as I will not see 75) with current rules and post 2027 when IHT is applied to it no tax as spouse does not pay IHT.

When your Spouse dies, her assets will be assessed for IHT in the normal way . If the pension pot is still there it will be added to everything else in her estate ( house, savings etc ) to calculate any IHT liability. ( presuming it is after 2027. 

Her estate  will have the benefit of inheriting your nil rate band of £325K to add to her own.
Also if the house is left to children there will be an additional £175K nil rate band X 2 .
So in that case only assets over £1 Million in her estate would attract 40% IHT.

With married couples, if there is any IHT liability, it usually only becomes payable on the second death

We have no children so estate (what’s left - we’ll house will be at least)  on her death will go to charity (local hospice). 

ukdw

In parallel to your wife drawing down £11k each year worth considering her paying £2,880 back in each year too - which will be boosted up to £3,600.

Although this might mean there would be a little bit left in the DC pension when she hits state pension.
8 x (11,000-3600) = 59,200 - so with growth probably slightly above the £60k.

Deferring state pension for a year or two might be worth considering at that stage if there ends up being a lot left in the pension.

cfw1994

Tax_Slave said:

In order for my wife to avoid future taxation on the taxable 75% of her pension pot we are considering the following;
Year 1 - Drawdown 25% tax free lump sum (£20,000) plus £11,000 (within tax allowance) = £31,000 tax free.

I’ll echo the fingers crossed for a miracle cure for you 🤞

Just a comment on the plan to take the TFLS then drawdown, & it might be irrelevant…
….but I have a relative with an old Aviva scheme.  She wanted to take the TFLS then at some later date start a regular monthly drawdown on the remainder.  

Her old scheme would NOT let her do that - she could only have made ad-hoc withdrawals in the future.  

She moved to a different Aviva SIPP which WILL give her the future flexibility she wants.

Best of luck.